Strategic Product & Pricing: Market Positioning & Competitive Advantage

Product Mix Strategy & Customer Perception

The products or services of an organization help to create the firm’s image in the mind of the customer. This image is reflected in the customers’ perceptions and feelings about its products or services. It is important, since experience with only one of a firm’s products or services can affect a person’s attitude toward the firm’s other offerings. This can apply even if the customer has never used the other products.

Products are more than tangible objects, and services are more than a visible activity. People purchase products and services to satisfy needs or wants and obtain benefits as a result. Organizations must understand the nature of these needs and wants to appreciate the kind of benefits people expect to obtain. Among the different kinds of benefits that people can obtain from buying goods and services are:

• Good value for money
• Ease of use
• Novelty
• Safety
• Availability
• Economy in use
• Good design

All these items are related to the value equation developed individually (and subjectively) by the consumer. Benefits enter into the equation when a customer decides to buy one product in preference to another. Similarly, when marketing a product or service, an organization should focus on the benefits it creates for the user. It is these benefits that make a product or service attractive to a customer. Organizations must communicate these benefits to the user, directly or indirectly, to persuade them to make a purchase. The capability of a product or service to produce the kinds of benefits desired by the user is exhibited in various characteristics of the product or service.

Product decisions must consider these various attributes offered by the company, aligning with positioning rules, consumer benefits, and brand loyalty (which reflects the image-identity balance).

Price-Positioning Strategy & Market Control

There are market conditions under which organizations can exert some control over the level at which price is set. If an organization cannot exert any control over the setting of prices, then it must accept whatever the market determines will be the price.

Market Control Over Pricing

Perfectly competitive markets are characterized by a homogeneous product, complete information among buyers, rational buyer behavior, and a large number of producers. In a perfectly competitive market, a producer has almost no control over prices; they are determined by market forces driven by competitive pressures and consumer expenditure patterns. There are extremely few such markets in reality. Most markets are imperfect, allowing for some control over price setting.

Understanding the Price Squeeze Tactic

A price squeeze occurs when discriminatory prices are sometimes charged by a vertically integrated firm supplying inputs to non-integrated rivals, in order to place the latter at a competitive disadvantage. This can occur when the integrated firm produces both the input and the finished product, while its customer produces only the finished product and is dependent on the integrated firm for supplies of materials, sub-assemblies, or parts.

A ‘squeeze’ occurs when the integrated firm charges the non-integrated firm a high price for the input while selling its own finished product at a low price. This allows the non-integrated firm only minimal profits, or even forces it into a loss. This tactic is common, for instance, when a company has a fixed direct cost and needs to spread it among potential consumers. In such cases, the company might offer the same service at a high price, adjusting it based on the demand reactions of targeted consumers (e.g., Vueling, a role-play theatre).

Penetration vs. Skimming Pricing Strategies

Penetration and skimming policies are most often encountered with new products, but they are sometimes applied in other situations.

Penetration Strategy: Gaining Market Share

With a penetration strategy, when introducing a new product, the objective is often to achieve early market penetration. The strategy involves setting a comparatively low price to stimulate market growth and capture a significant share. The experience curve effect can lead to increased long-run profitability by gaining a large market share or fostering market share growth. A penetration strategy may be appropriate if the market is highly price-sensitive, if a product benefits from economies of scale in production, or if a low price discourages actual and potential competition.

Skimming Strategy: Maximizing Early Revenue

A skimming strategy contrasts with a penetration strategy and capitalizes on buyers who are prepared to pay a much higher price due to strong demand for the product. Firms adopting this strategy may initially set a high price to capture a premium from such buyers, reducing it progressively to attract more price-elastic segments. This strategy is appropriate when there is a substantially large number of buyers whose demand is relatively inelastic. It may also be used when unit production and distribution costs for a smaller volume are not significantly higher, thus not negating the advantage of charging a premium, or when there is little risk that a high price will stimulate new competition.

Competition-Oriented Pricing Strategies

With competition-oriented pricing, first, consider the current stage of the market or industry life cycle and the company’s position within it. This directly affects the “price architecture” and can lead to a loss of control due to competitor or distributor decisions. In this case, a firm ensures that its prices align with those charged by competitors, often referred to as the going-rate price. This pricing approach is frequently used in homogeneous product markets where the market structure ranges from pure competition to pure oligopoly. In a purely competitive market, a firm has little choice in setting its price. In a pure oligopoly, firms have more choice and can charge the same price as competitors. Given that there are only a few firms, each is aware of the others’ prices, and buyers are also well-informed.